ASH: Ukraine should not have to pay for this war

ASH: Ukraine should not have to pay for this war
The West has come to Ukraine's aid with billions of dollars in funding, but much of it is being offered as loans, not grants. By the end of this year its debt-to-GDP ratio could double to over 100%. If Ukraine is fighting not just for its own liberty but Western values, should it be made to pay?
By Timothy Ash Senior Sovereign Strategist at BlueBay Asset Management in London June 13, 2022

Ukrainians are defying overwhelming odds and standing up to Russian aggression. They are showing remarkable bravery in defending their own country and unfortunately many thousands have likely sacrificed their lives in this war. But let us not forget that they are fighting not just for their own country but for Western values against a brutal dictator, Vladimir Putin, who has declared war on the West. This week he admitted that this is a war of expansion and colonial ambition. Ukrainians are hence on the front line, defending Nato and the West, against Russian attack.

The cost in Ukrainian blood is huge, but also in money. Ukraine is thought to be running a budget deficit of $5bn per month multiples larger than its pre-war condition. 

The West is providing some financing, but still not enough, and unfortunately too much of this is in the form of loans and not grants. 

To its credit, the new $40bn US support package for Ukraine includes $7-8bn in grant aid for the Ukrainian budget. The EU has pledged close to $9bn but in credit.

Let’s get this right, Ukraine is fighting this war on our behalf and is in effect being charged for it.

The consequences of this are that unless loans are turned into grants, on current trends Ukraine could face an unsustainable debt burden by year end, approaching 100% of GDP on not unrealistic macro assumptions. This would mark a doubling of this ratio from its starting point on February 23.

Ukraine has made clear that it wants to maintain its creditworthiness and pay debt service, despite the war. It is continuing to service its debt obligations remarkable really given the priority draw on government resources from the military.

In paying it is clearly thinking of post-war recovery, and the importance of market access to ensure Ukraine rebuilds and recovers quickly.

A default would set back that recovery, stall market access and keep its borrowing costs elevated for an extended time just when it will need access to plentiful cheap financing from both the public and private sectors. Its financing needs are likely to run into hundreds of billions of dollars and only a joint public and private partnership can hope to ensure its financing needs are fulfilled.

It makes sense at this stage to focus on ensuring Ukraine avoids default any such outcome would be a huge PR win for Putin. Indeed, going back to comments made by Putin back in 2000, only truly sovereign states pay their way; the irony therein is that Russia is currently on the brink of default.

So how can a Ukrainian sovereign default be avoided?

First, and as noted above, the West needs to think about the funding mix. The balance needs to be skewed towards grants and away from debt.

Secondly, while it seems fair that Ukraine should not have to pay the financial cost of this war, it can equally be questioned why Western taxpayers should pay when the country clearly, and without any doubt, responsible for those losses is being allowed to get away without reparation? Iraq had to pay reparations for losses it imposed on Kuwait in the first Gulf war, so why not Russia now? And usefully the West has access to $300-400bn in Russian assets now frozen because of this war. Surely there is no moral argument why these funds should not be utilised for the costs of the war to Ukraine. 

Now I know this is seen as shaky legal ground because of concerns about precedents this might set for attachment and use of private property. There are fears that this will inhibit the likes of China or Gulf states keeping assets in the West. Well, they should have no concerns if they have no intention of invading sovereign territory, partaking in genocide and war crimes and declaring war, in effect, on the West.

Laws can be changed with political will. And surely there has to be the political will to act. If not, where is the political appetite in the West to allow taxpayers to bear the hundreds of billions of dollars in costs for Ukraine’s rebuild? If frozen assets are not used, then it is unlikely that sufficient funds will be raised for Ukraine’s recovery. And if Ukraine is not helped to fully recover then Putin will have won. Invasion will have proved to pay for Russia.

On the practicalities, laws take time to change. But as an interim measure Western countries could pledge to make this happen and pledge a share of frozen assets to be used as collateral to set against Ukraine’s rising debts. Think of it as a new Brady bond style plan. But if investors know that a weight of Ukraine’s debt stock say anything above the starting point pre-war of 50% of GDP is covered by hard pledges on frozen Russian assets, this will assure private investors of the sustainability of Ukraine’s debt burden, helping keep borrowing costs low and ensuring continued markets access.

Thirdly, the temptation might be to approach private sector involvement in the normal manner through debt relief. This is not cost free, though. It involves the stigma of default, elevated short-term borrowing costs and limited market access for a period.

But once the war ends Ukraine’s rebuild financing needs will be huge and immediate hospitals, schools, critical infrastructure. Ukraine needs to get off the ground running. Official financing is hardly likely to be enough and legal issues around utilising frozen Russian assets might take some time to resolve.

Rather than seeing the private sector involvement coming through debt relief, what about focusing on new money? This will be more likely if the spectre of default can be avoided.

But the private sector should have ample business and moral reason to put money on the table for Ukraine reconstruction.


Well the damage to Ukrainian infrastructure is so huge the rebuild spend will be enormous think GDR rehabilitation upon the unification of Germany. Business opportunities for Western business and banks will be enormous, and those pledging to contribute to a new Marshall plan for Ukraine should be primed to participate in rebuild projects.


ESG is the new watch word for Western business. Doing the right thing, or showing you are doing the right thing is a marketing tool that business now flaunts. What bigger/better ESG story than helping Ukraine’s recovery from genocide and helping Western liberal market democracy succeed with economic development in Ukraine? Important herein to recognise that Putin has already, through his attack on Ukraine and various other malign actions against the West, shown he wants to attack and undermine our very system of government, and the rule of law upon which Western business has prospered.

I would hence propose that as a starting point the top 50 Western financial institutions commit €1bn each to Ukraine’s longer-term recovery programme. This could be matched by official sector contributions and a further draw-down of Russian frozen assets, even collateralised by these same assets.

A billion bucks each sounds a lot, but what price the success of our very system of government? And have the thousands of Ukrainians who have given their lives for us not earned a suitable memorial which would be the successful reconstruction of Ukraine?

Timothy Ash is the senior sovereign strategist at BlueBay Asset Management in London and a veteran Russia/Ukraine watcher. This comment first appeared in a note emailed by Ash to clients.